Overview

For the past week, I have read countless articles which point out that silver is looking “fantastic.” It seems to me that precious metal speculators are looking for gold to go to $1,300 an oz, so they are looking at silver as a levered play on that. Phil Streible, senior market strategist for RJO Futures, is looking for a move to the 20 level if silver can show “resilience.” The silver trade is fairly crowded and there has been some nice appreciation as of late, so I could see people heading for the exits if the $17 level doesn’t hold.

Over the last 5 years, silver has lost around 40% of its value, and over the last 9 months, we have seen a descending channel of lower highs and lower lows. However, people are starting to believe that silver and gold are setting up for a bullish cycle. We are currently at the top of the descending channel and a breakout to the upside will likely bring about increased buying pressure. I think the situation has evolved to a place, given the technicals and sentiment, where we either get a classic fake out and head lower or we start a true bull cycle.

The COT Report

I think COT reports are much more useful when put into a historical context. Thus, I want to see how bullish or bearish the most recent reports are relative to the most bullish and bearish positioning over the preceding 5 years. A reading of 100 would represent a given group being more bullish than they have ever been over the past 5 years and a reading of 0 would mean that their current position is more bearish than they have ever been over the past 5 years. The most powerful readings, as far as predictive power, come when there are extreme readings and/or divergence.

There is some really interesting action occurring in the silver futures market. Commercial producers’/users’ positioning is currently in the 13th percentile. Commercial producers/users are essentially saying that the current prices are expensive. Producers are looking to hedge at the current levels because they want to offload as much as they can at the current prices and users are not looking to lock in their inventory needs because they think prices will go lower.

Speculators’ positioning is in the 88th percentile, which implies a high level of bullishness. The majority of speculators that would go long on silver are likely already long. Overall, the analysis suggests that silver is heading lower.

All three factors that I look for in a bullish move are in place for SLV (NYSEARCA:SLV) to push higher. Firstly, the Tenkan-sen, the fast moving average, is above the Kijun-Sen, which is the slow moving average. This bullish crossover just recently occurred. Secondly, the price action is occurring above the Kumo, which is the green cloud area. Lastly, the Chikou Span, the grey lagging indicator, is positioned in a manner that is confirming the bullish trend. Overall, the Ichimoku cloud analysis suggests silver is heading higher.

The chart depicts the bulls in full control with the current price being above all 7 of the critical moving averages. The SLV gapped up hard on Monday, and now we need to see if it will respect the 200-day moving average or at least consolidate around the 200-day moving average. If not, then it will likely back fill. Back testing shows that the 85% of gaps, or more depending upon the universe of securities scanned, are eventually filled.

5-day moving average support: 16.89

9-day moving average support: 16.71

13-day moving average support: 16.54

20-day moving average support: 16.6

50-day moving average support: 16.66

125-day moving average support: 16.43

200-day moving average support: 17.12

MACD & RSI Provided For Further Context

MACD: The signal line is above the base line and both lines are above zero, which is very bullish.

RSI: A reading of 64 suggests that the SLV is fairly overbought, but overbought readings will always be seen during robust moves to the upside.

The Bottom Line

To summarize, the COT analysis suggests that silver is heading lower, but there is a caveat. The current readings demonstrate extreme divergence, but the only readings that have seemingly flawless predictive power are when one group is in the 5th percentile or lower and when the other group is in the 95th percentile or higher. All forms of technical analysis are very bullish, but we are at a critical level and the current move looks overextended. I will not be opening a position because the COT report gives me serious pause and we are quite possibly at a point of reversal.

An examination of the WTI crude futures market before the latest breakdown illustrates how effective this particular form of COT report analysis can be. Everybody was saying that $60 a barrel was right around the corner when crude was around $54 a barrel. The setup looked bullish, but crude has since gone on to lose over 10%. Right before the breakdown, commercial producers’/users’ positioning was in 9th percentile and speculators’ positioning was in the 98th percentile.

I will be keeping a close eye on the gold market as another way of confirming if we are in fact beginning a new cycle because gold often leads silver. The current 10 period, 20 period, and 50 period correlations of the SLV to the GLD are all above +.8.

There are some mixed signals, so what does it all mean? Well, I’m looking to see if SLV can hold the 200-day moving average. I want to see more price action. I think we may be starting a bull cycle, but I need confirmation. There is absolutely no need to rush into SLV. If we really are starting a bull cycle then there will be plenty of upside to be had. I would always rather lower my risk and just catch the meat of the move than be bold and lose money. People associate great speculation with making bold calls, but I’m not a fan of making bold calls when it comes to commodities. I’m not trying to be first, but rather just early.

Author’s note: To get more investment ideas like this as soon as they are published, click on my profile and hit the big orange “Follow” button and choose the real-time alerts option. I write about various topics, but I have a particular passion for biotech equities and gold.

My latest activities: I will be posting brief notes on my Instablog when I see interesting speculations (swing trades and day trades). I’m doing this because big winners often develop so fast that I can’t write and publish a detailed article in time for readers to be able to capitalize. For example, my last day trade centered post detailed why you should consider buying Protalix BioTherapeutics (NASDAQ: PLX) and the next day it ran over 20% and in the same post I said that Catabasis Pharmaceuticals (NASDAQ: CATB) was a gap fill candidate and the next day it went up over 60%. I enjoy the community on Seeking Alpha and I’m excited to continue to help people build their brokerage accounts. Thanks for reading and good luck.

Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in SLV over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.